Padaeng Industry, Thailand's sole zinc producer, forecasts that its net profits this year will be slightly lower than last year's record of Bt1.77 billion.

Sales are expected to remain unchanged from last year unless demand picks up.

The political situation is seen as the main negative impact that could dampen local demand. A reduction of import duty for zinc ore from 3.25 per cent to one per cent could also lower the selling price.

Moreover, production is likely to decline slightly from last year due to an increase in low-quality zinc. Zinc prices remain high, albeit not at the level of last year.

Managing director Bernard Tonnon said politics still posed the main risk to the company's bottom line. Zinc demand dropped by 25 per cent in the fourth quarter last year from the previous quarter because of political uncertainty.

"Customers do not know when new projects will begin, when a general election is scheduled and what new policies would be. As a result, they do not invest," he said.

However, the company continues to rely mainly on the domestic market, which is expected to grow at the same pace of last year at 2 to 3 per cent. But it can turn to the overseas market if domestic demand is sluggish.

In the second half of last year, Padaeng Industry increasingly shifted to the European and US markets, where it could gain a premium from the high zinc price after facing falling domestic demand.

Tonnon said the zinc price also played a key role in the company's performance. A decreasing price could hurt its income and profit after the price jumped to a historically high level last year. Brokers forecast that this year's price range is expected to be about US$2,800 (Bt99,680) to $4,500 per tonne.

Woratip Rerkpiboon, investor relations manager, said the baht's appreciation would have a negative impact on the company's performance as it quotes prices in dollar terms. It forecasts the baht to be at Bt36 to Bt37 against the greenback.

"The strong baht is a concern because it could hurt income," she said.

She said, however, the company had already hedged for the baht to be at Bt41 a dollar and the zinc price was hedged at $1,661 per tonne for 19,950 tonnes. This would limit the company's income and profit if the market price rose.

It has no policy for additional currency hedging this year. The company's annual production is about 100,000 tonnes and is likely to fall slightly from 2006.

Long-term debt of Bt80 million is to be repaid totally this year, Woratip said.

Anoma Srisukkasem

The Nation